Higher Rates Mean Severe Recession: Strategist

The world’s central banks are all considering whether it is time to end the ultra-loose monetary policiesthat have helped the global economy recover from the financial crisis but one strategist believes the tighter monetary policy can only lead to recession, and a severe recession at that.

“Throughout the current cycle, the world economy has progressed disappointingly. In its ‘weak’ phase, it underperform­ed. And in its ‘strong’ one, it’s done so as well. The outlook is not good. Activity is due to peak again this autumn. Thereafter, another recession may occur,” Roger Nightingale, a strategist at Pointon York told CNBC on Tuesday.

“It’s possible it’ll be a severe one because large numbers of central banks will have raised interest rates into the slowdown,” he said.

“Many in the 'emerging world' began doing so in 2010. Some in the commodity-producing world followed suit a little later. And the ECBis currently itching to add its two-pence to the restrictive cocktail,” said Nightingale.

With personal debt so high and consumer confidence so weak, Nightingale believes higher rates now could lead to a recession, "possibly as bad as the last one".

Denial Not a River in Africa

Dismissing the positive comments on the global economy from politicians and policymakers as wishful thinking, Nightingale believes they are simply trying to keep spirits up, knowing they have got it wrong and are unwilling to admit it.

“They know that credit shouldn’t have been allowed to grow so recklessly in the nineties. They know that delinquent banks shouldn’t have been bailed out when they implod­ed. And they know that cuts in public spending shouldn’t have been timed to coincide with the cyclical downturn,” said Nightingale.

“The developed countries that look least troubled now are those that in the past most closely followed these rules: Germany, Japan and the US,” he said.

“For a couple of years, equity markets have been strong. Easy money and strongly recovering corporate profits have been the driving forces. Neither will be so favorable in the future. The chances are, therefore, that indices will be drifting lower in the second half of 201” said Nightingale.